The No. 1 mistake Americans make with their credit cards—it’s like ‘owing money to a loan shark,’ expert says

The biggest mistake you can make with credit cards is to carry a balance every month, financial planners say.

While credit cards are a convenient way to spend money, they have punishingly high interest rates that now average 20.75%, according to Bankrate’s most recent data. This rate — known as annual percentage rate — is up from an average of 16.40% two years ago.

Compared to the single-digit interest rates you can get with other loans or mortgages, APRs on credit card debt are “exorbitantly high,” says Noah Damsky, a chartered financial analyst and principal at Marina Wealth Advisors. As such, carrying a balance can feel like “owing money to a loan shark,” he says.

To avoid wasting your money on interest, it’s best not to carry an outstanding balance on your credit card, if you can.

With high-interest credit cards, it can be hard to pay off debt quickly even if you make just the minimum payments each month. That’s because the typical minimum payment is mostly interest — as much as 90% depending on how it’s calculated.

In effect, minimum payments merely prolongs the length of time will owe money while also increases the amount of interest you pay. For example, it would take 277 months of minimum payments to pay off a balance of $5,000 on a credit card with 20% APR, according to CBS News. Over that period, you’d pay $7,723 in interest on a $5,000 loan.

“Paying the minimum balance each month is not a good practice for the same reason that failing to pay off the balance each month is the biggest mistake you can make with a credit card,” says Daniel Masuda Lehrman, a certified financial planner. In both cases, any unpaid balance will compound with interest, making it “exponentially difficult to pay off,” he says.

Still, making any payment is better than none at all. Missing your minimum payment within the monthly billing cycle can incur a late fee of up to $40, a higher APR and even dent your credit score — which is what lenders use to determine your interest rate on loans or credit cards.

As a best practice, only use your credit card on expenses that you can afford to pay off relatively quickly, ideally within a month of the purchase.

By doing so, you can largely avoid interest as most credit cards offer a grace period in which interest won’t accrue. A credit card’s grace period is between the end of the billing cycle and the payment due date listed in your monthly statement. Just note that a grace period likely won’t apply if you have an outstanding balance.

Some credit cards — typically subprime credit cards — don’t offer grace periods. In that case, the best practice is to pay off purchases as soon as you can, since credit card interest compounds daily.

“I advise my clients to avoid using credit cards altogether if they cannot afford to pay off the balance each month,” says Lehrman.

If you’ve been in the habit of running a balance until now, though, you’re not alone. The average outstanding U.S. balance was $6,501 in 2023 — an increase of $591 from the year before, per Experian data.

You want to minimize your exposure to unnecessary interest as best you can by dipping into cash reserves, says Lehrman.

“I would recommend using a debit card or emergency fund to avoid carrying a balance on a credit card,” he says. Financial planners typically recommend keeping an emergency fund of cash savings that’s worth three to six months of your expenses.

If you already have credit card debt, financial planners commonly recommend that you pay it off as quickly as possible. One way to do that is a balance transfer to a credit card with an introductory 0% APR offer, as that will give you more breathing room to pay down your debt, says Lehrman.

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